January 23, 2023
By Paul Calabrese, Principal, Outsourced Accounting & Advisory Services
If you’re like many government contractors (GovCons), the theory behind indirect rates is difficult to understand. Unfortunately, many GovCons set up an overly complex, 3-tier indirect rate system and discover later that it is not required at the onset. To help small and emerging contractors better understand what is required of their organization, it is helpful to understand the difference between overhead and General and Administrative (G&A) expenses under a federal contract. For additional guidance on developing indirect rate structures, reference the Defense Contract Audit Agency’s (DCAA) standard indirect rate template, ICE (Incurred Cost Electronically).
The Indirect Rate Allocation Process
Most service-oriented GovCons have a 3-tier indirect rate allocation process that includes fringe benefits, overhead and G&A. Fringe benefits can be a separate indirect rate that functions as a service center where the fringe allocation is applied to direct labor, bid and proposal labor, independent research and development labor, indirect overhead, and G&A labor.
Alternatively, the specific fringe expense accounts may be charged separately to the overhead and G&A cost pool (the numerator of the indirect rate fraction). Typical fringe expenses include payroll taxes, federal and state unemployment tax, worker’s compensation, medical/dental/life and vision insurance, 401k pension, tuition assistance, long or short-term disability and other benefits.
What is the Difference Between Overhead and G&A?
Every GovCon’s cost accounting system will include a unique indirect cost allocation and rate structure. Overhead and G&A expenses are distinguished by their location or operations. Overhead is applied to managing the contracts of a small portion of a business, dedicated to work in a geographic area, a function (like engineering), or a business line such as logistics. G&A supports the entire business such as finance, accounting, accounts payables, or payroll, where the support is applied to all transactions and all personnel.
A local overhead relates to smaller segments of the company based on a business line or the type of contractual services, such as materials, that include purchasing, manufacturing, engineering, geographic location, on-site or off-site overheads. For example, a labor type for indirect overhead would be a vice president of a business line, geographic location, or function, such as fabrication or engineering. That same vice president or another department head managing a specific overhead may have contracts and/or marketing personnel, or their indirect allocation design may include those positions in the company’s G&A. There may also be administrative staff to help the vice president managing an overhead group. Similarly, if the overhead includes a large facility, then a facility manager may be assigned to a particular overhead. Simply put, if an expense benefits or relates to a specific segment of the company, it would likely be considered overhead.
Conversely, G&A expenses benefit the entire business as-a-whole. Whereas a GovCon can have multiple overheads such as on-site at a government installation, off-site (from the government installation), or geographic overhead at Norfolk, VA versus Washington, DC area. There may even be a manufacturing/fabrication overhead for these specific purposes, or specific functions or business lines (such as logistics vs. engineering). Either way, there is generally only a singular G&A cost pool.
The G&A cost pool typically includes the salaries and benefits of c-suite personnel as well as business development, finance and accounting, HR, IT, purchasing, contracts, and compliance. G&A also includes expenses associated with financial statement audits, local/state/federal income tax (unallowable), and other typical unallowable expenses such as advertising, public relations, interest, and bad debts. Expenses associated with bids and proposals and independent research and development are also included in the G&A cost pool vs. overhead.
Commonalities with Overhead and G&A
There are several indirect expense accounts that are common to both overhead and G&A such as indirect salaries, fringe benefits (allocated or by specific expense account), office supplies, postage and printing, facility cost, and indirect travel. Telephone, internet, website, computers (under the capitalization threshold), and software may be allocated to both overhead and G&A, or only to G&A, depending on the design of your indirect allocation system. For more guidance, reference DCAA’s template, ICE (Incurred Cost Electronically).
Getting your Arms Around Overhead and G&A
If you are new to the government contracting world or unsure whether your indirect cost allocations and indirect rate structures are adequate, consulting a CPA who has experience working with government contractors is recommended. An experienced CPA will help you achieve the best cost recovery and meet the compliance requirements of agency auditors. In particular, subcontractors should carefully consider their indirect rate structure. Those with overly complex systems requiring unnecessary accounting support can inadvertently overbill the prime contractor leading to repayment issues in the future.
GRF offers a broad range of accounting, audit, tax, and advisory services, including indirect rate consulting, to government contractors nationwide. Learn more about GRF’s services for government contractors.
Principal, Outsourced Accounting & Advisory Services